By Jeff Miller :
There was something of a change in tone last week. There is more recognition of improving conditions. With a tailwind from improving earnings, more will be wondering:
What if you have missed the rally?
Last Week Recap
Last week began with stories about revised targets for the market and ended with Fed speculation. The market took the international stories and news about President Trump in stride.
The Story in One Chart
I always start my personal review of the week by looking at a chart of market price moves. The Wednesday pre-market release of Chair Yellen's Congressional testimony was the most notable feature. The market gained 1.4%, reaching a new all-time high.
I am on vacation starting Friday and through the next week. This means that I will probably miss two installments of WTWA. Since readers requested and appreciate the "limited editions" we have produced when I have been away, we'll do that again. We will include indicator updates, a few observations on news and worries, and perhaps some "timeless" advice that has special relevance right now.
Since I cannot ever get completely away, I'll be in touch with events and my office. Is something important is happening, I'll get involved. The last time I went to Toronto my vacation was spoiled by the debt limit crisis. I hope to avoid a repeat of that!
Each week I break down events into good and bad. For our purposes, "good" has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news - and you should, too!
The economic news last week was mixed, but tilting positive.
- Industrial production for June was up 0.4%, slightly beating expectations and much better than last month's 0.1%.
- JOLTS showed a high quit rate. Those voluntarily leaving jobs represent a sign of strength. The analysis of overall labor market conditions (the Beveridge curve) is also important. Anyone focusing on "job openings" or "job growth" is not using the best data and is also on the wrong theme. Bespoke has it right.
- Inflation remained low. I understand that many treat this as "bad news" because it is not hitting the Fed target. This makes no sense. If we could get good economic growth without inflation, that would be wonderful. We should not be cheering for more inflation unless it reflects an improving global economy.
- Earnings reports are strong. It is still early in the season, but reports are beating expectations at a higher rate than in the past five years. Same for revenue, and the size of the beat. ( FactSet has more details and charts). Avondale monitors conference calls, providing useful color. Their news is also encouraging. Check it out for yourself.
- The first gene therapy was endorsed by an FDA advisory committee. We are still some distance from widespread use, but my guess is that ten years from now, this will be the most important news from this week. The Washington Post has a nice account.
- Fed news satisfied the markets. That is one test, but it does not change the favorite sport of Fed-bashing.
- Jason Cawley (who brings strong analytical skill and experience to the problem) takes a refreshing perspective in his article, Grading the Fed . He analyzes the Fed in terms of their own stated objectives - not those of critics. Those interested - and you should be - must read the entire article and the grades for each objective. Here is an example chart.
He concludes as follows:
I submit that most of those criticizing recent Fed policy from various points of view seldom apply their proposals with the rigor shown above, or explain why they believe their alternative proposed measures of Fed policy success would be superior to its published methods, or where and when their different proposed measures would grade recent Fed performance poorly. I invite them to do so in the comments section below, or in their own articles.
- The NY Fed has a great explanation of how the balance sheet is adjusted. If you understand this, it provides an antidote to some of the daily misinformation. ( Economicintersect.com highlighted this story, as it does with so many useful articles). There is a great chart sequence (clear, but too long to reproduce here) that shows the effect of Fed actions. If everyone spouting an opinion had to pass a short quiz on the basics, the world would be a quieter place!
- Rail traffic declined. Steven Hansen ( GEI ) analyzes the data with an important adjustment for coal and grain.
- Small business optimism dropped from the recent peak. The NFIB attributes the decline to a stalled Trump agenda.
- Michigan consumer sentiment declined from the final June reading (93.1 versus 95.1). While still high, this was a slight miss of expectations.
- Retail sales disappointed, declining 0.2% instead of the expected 0.1% gain. This is an important series to monitor in the months ahead.
- Lower leading indicators? New Deal Democrat , who unmasked some of the secret ECRI indicators, continues to follow some of their original choices. He notes that several of these indicators are turning South - another subject to monitor.
The Ugly Humorous
There is always some "ugly" news in the world. I was planning to go with this story about 44 million people needing side jobs. I instead choose to share a few good laughs with an important lesson - no one really knows what business ideas might work! Too make sure that my humor is on track, I consulted Mrs. OldProf, who approved this message!
Shark Tank: The lost pitches
I hope you enjoy it as much as we did.
The Week Ahead
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.
It is a more normal economic calendar. As always, I am especially interested in the housing starts and building permits. While they are lower on my priority list, many are fans of the leading indicators and the Philly Fed.
The big stories will be about earnings. Senate action on the ObamaCare replacement bill is supposed to include a vote this week. Investors are interested not only in the specific health-care effects, but the implications for other items on the Trump agenda, most notably tax cuts.
Briefing.com has a good U.S. economic calendar for the week (and many other good features which I monitor each day). Here are the main U.S. releases.
Next Week's Theme
Despite the busier calendar, earnings stories will command attention. There is evidence of a changing mood. After months of focus on negative news, the move to new stock market highs is creating new questions. Many will be asking:
Have you missed the rally? And if so, what next?
Here is the background.
- The big and "smart money" has also been fighting the rally all of the way. Do a search on "missing the stock market rally" and you will see annual articles, including reports on major investors.
- Those waiting for a correction have seen few chances, usually quite small.
Doug Short and Jill Mislinski have a chart that is quite helpful for long-term perspective. It shows the frequency and size of drawdowns.
- When there is a correction, those allegedly waiting do not buy. The same sources and reasoning that made them cautious convince them that this is the "big one."
- Those in the market are called names, the gentlest of which is "dumb money." They are supposedly " ignoring warnings " from indicators like gold and bonds.
- Despite the allegations of market "complacency" the low volatility results from a cautious balance of bullish and bearish attitude. Ian Bezek sees Too Much Bearishness .
As usual, I'll have more in my Final Thought.
We follow some regular featured sources and the best other quant news from the week.
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards . I monitor many quantitative reports and highlight the best methods in this weekly update.
The Indicator Snapshot
The Featured Sources:
Bob Dieli : Business cycle analysis via the "C Score.
RecessionAlert : Strong quantitative indicators for both economic and market analysis.
Georg Vrba : Business cycle indicator and market timing tools.
Brian Gilmartin : All things earnings, for the overall market as well as many individual companies.
Doug Short : Regular updating of an array of indicators. Great charts and analysis.
Many readers share my interest analyzing data. The new interactive tool from the Council on Foreign Relations lets you analyze the breakeven price point for oil exporting countries. There are multiple approaches and features. I cannot do justice to it in a static chart, but here is an example.
Insight for Investors
Investors should have a long-term horizon. They can often exploit trading volatility!
Best of the Week
If I had to pick a single most important source for investors to read this week it would be Seeking Alpha Editor Eli Hoffman's interesting question, What If Warren Buffett Was A Macro Trader? Citing Bloomberg strategist Cameron Crise, he considers the impact of an annual 12% stop loss on Berkshire Hathaway. Many who think of themselves as long-term investors also subscribe to techniques that traders swear by. The all endorse stop losses . What do you think the result was?
It turns out that Buffett would have been stopped out in 18 of the 30 years for which Bloomberg has data for the BRK share price. In fact, between 1997 and 2005, a risk-managed BRK would have delivered zero return versus the 8.5% annual gains that Buffett actually produced. Had he been trading macro, there's little doubt he would have been fired.
Volatility would have been lower, but the overall gain only half as much.
[Jeff]: Investing has no miracle answers, no matter how confidently they are stated by proponents.
It was an active week for ideas from an array of great sources. There are plenty of stocks worth your consideration.
Eddy Elfenbein does a mid-year review of his buy list, with a special look at recent earnings. The easiest way to join in Eddy's success is to buy his innovative ETF, CWS . If you look at the list, you will also see a few laggards - probably good candidates. Smuckers? ( SJM ).
Chuck Carnevale illustrates this week's theme perfectly. He advises reduced worry about overall market valuation, and more attention to individual stocks.
Peter F. Way's innovative selection method is not enthusiastic about auto stocks. Check out the specific ratings and charts. Also see his analysis of the best 20 communications stocks.
Brian Gilmartin does an exhaustive, earnings-based analysis of Schwab ( SCHW ). His consistently excellent, specific-company analyses are a great source of ideas.
Energy? Barron's (subscription required) follows up last week's emphasis on energy with a cover story this week.
Simply Safe Dividends analyzes a company that has not missed a dividend in 122 years. That is only the starting point for his thorough analysis of Colgate Palmolive ( CL ).
Marc Gerstein uses his Portfolio 123 platform for a careful and contrarian analysis of GAP ( GPS ). He finds the dividend reward/risk to be attractive, despite the current consensus against brick-and-mortar retail.
Seeking Alpha Senior Editor Gil Weinreich has an interesting topic every day. This week I especially enjoyed his commentary on the national debt. As usual, he highlights the analysis of one of our colleagues, while providing some counterpoint. This week it was Charlie Bilello , who generally assuages concerns - at least for investors. This is a great topic - and on my future calendar.
Gil also has interesting links. In this edition, my favorite is David Merkel's analysis of the difficulty in determining risk tolerance. This is an important topic, and David has nailed it.
Watch out for….
Tesla. Paulo Santos analyzes the effect of a (likely) upcoming cut in revenue.
Blue Harbinger explains why an attractive yield might well be a warning - Omega Health Investors ( OHI ). Blue Harbinger will be our guest expert on this week's stock exchange, so check in for more of his thoughts.
Emerging markets? Watch the debt levels .
Last week I described the elements of a strong investment process. If you missed that, it will be helpful to take a look back.
Here are the main reasons some people have missed the rally in stocks:
Stocks are expensive in terms of history.
Stocks are attractive when measured as "yield above expected inflation."
Stocks are behaving like they did in 2000.
In general, using YAEI, stocks are cheaper than bonds and bond substitutes. Some stock sectors are very cheap.
Stocks are due for a correction.
Corrections do not come with a set schedule, and cannot be reliably predicted.
The bull market is too old.
There is no expiration date on bull markets.
There are big geo-political threats.
Market risks are high.
Measured objectively, risk is at a low point.
The moment I invest, the market will tank.
This is a common worry, so you are not alone. It is a psychological matter, not an unemotional investment strategy.
It is too late to invest. I missed the rally.
No one knows how long the stock rally will last, or how far it will go.
I have almost all cash, and need to be careful.
Get back in gradually - but with a specific plan.
If you would like more detail than the summary above, request my short paper, Getting Back in the Market . This has more specific suggestions about attractive stock sectors and good tactics. The Top Twelve Investor Pitfalls will help with your plan. Understanding Risk might also be of interest. All are free at your request from info at newarc dot com.
Investors might also appreciate our Stock Exchange's advice to traders on Trading the Earnings Season . If you check out the post you will see that it is a difficult problem for traders, but might well be an opportunity for investors with a plan.
What worries me…
- The upcoming debt limit issue. No signs of progress so far.
- Senator McCain's recovery from surgery. He is a national hero, and his absence demonstrates the fragility of potential coalitions. I am sure that readers join me in wishing him a speedy recovery.
…and what doesn't
- The Fed. That includes both rate increases at a reasonable pace and the planned balance sheet reduction.
- Stock market valuation. Stocks overall seem mildly attractive if you consider expected earnings and interest rates. More importantly, some are significantly overvalued and others are attractive. Stock and sector picking are more important than market valuation.
See also Elroy's Elliott Wave Weekly on seekingalpha.com